Why It’s Hard to Get a Loan

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Wonder why your bank doesn’t have room for you on its balance sheet? Check its exposure to commercial real estate lending. Distressed CRE loans continue to choke banks’ balance sheets, and their poor performance could force some U.S. banks to raise more capital, or even cause them to fail.

Midsize banks in particular are highly exposed. In an analysis of data provided by Capital IQ, CFO found 44 U.S. banks with assets greater than $1 billion (the recognized ceiling for a small bank) that had more than 50% of their total loans secured by CRE. The largest was First Citizens Bancshares of Raleigh, North Carolina ($21.1 billion in assets), which had 57.5% of its total loan book in CRE as of the first quarter. In total, the 44 banks held $86.9 billion in CRE loans.

Dime Community Bancshares of Brooklyn, New York, had close to 100% of its loan portfolio in CRE at the end of the first quarter. (Dime’s loan portfolio is collateralized primarily by multifamily apartment buildings in New York City, widely considered the least-risky type of CRE, says the bank.) Rounding out the top five were Wilshire Bancorp, Nara Bancorp, Intervest Bancshares Corp., and Dearborn Bancorp Inc., according to Capital IQ data. Fifteen of the 44 banks had more than 60% of total loans in CRE.

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The average bank in the population had 5.3% of its loans classified as nonperforming, meaning a loan is currently not accruing interest. At 5 of the 44 banks, nonperforming loans represented more than 10% of the total loan books. Naples, Florida-based bank-holding company Bank of Florida had the highest nonperforming loan ratio, at 14.9%. The FDIC closed three affiliated banks owned by Bank of Florida in late May, and the holding company was delisted from Nasdaq on June 3.

CRE also looms as a big threat for the biggest banks. In a report released Friday, the International Monetary Fund said it conducted “stress tests” of the 53 largest banks in the United States. The IMF found that in a baseline economic scenario of moderate GDP growth this year and next, 12 of the 53 banks would need to raise as much as $14.2 billion in the next four years to maintain minimum regulatory capital ratios.

In particular, the IMF highlighted problems with CRE loans: nonfarm nonresidential loans for properties such as shopping centers, motels, office buildings, and automobile dealerships. They are a big threat to banks’ capital situations, the fund says.

Delinquency rates on CRE loans fell slightly to 8.6% in the first quarter, according to the Federal Reserve, but that was off a 17-year high of 8.71% in 2009’s fourth quarter.

“Given the employment situation, which tends to be a good indicator for CRE, commercial property prices are not expected to recover soon,” says the report. (CRE prices are down 41% from where they were in 2007.) “Around $1.4 trillion of CRE loans are expected to mature by 2014, and almost half of these are underwater or seriously delinquent. [In addition], the market for commercial mortgage-backed securities remains depressed.”

Of the $1.4 trillion, $245 billion matures this year and $245 billion will mature next year. It’s when CRE loans mature and borrowers need to refinance the existing loan that banks may have to realize losses and suffer more hits to capital, says Malay Bansal, managing director of NewOak Capital LLC, an asset management and capital markets advisory firm. “A lot of these banks have loans they haven’t marked down enough,” says Bansal. “Regulators are giving them a fair amount of leeway to manage portfolios, to avoid a fire sale.”

But when some CRE loans mature, lower property values and lower leverage available will mean borrowers that need to refinance will get smaller loans, and they will have to come up with capital to repay the old loans. If they don’t have it, they will be forced to default, says Bansal.

Small banks with significant exposure to CRE and limited access to private capital could be especially vulnerable to capital stresses, the IMF said in its study. That’s because while CRE exposure makes up only about 10% of total bank loans nationwide, “it represents 50% of smaller banks’ loan books,” the fund said. At seven banks the FDIC closed two weeks ago, CRE made up 80% of the nonperforming loans.

Some banks made headway in cutting their CRE exposure in the second quarter. Dime Community Bancshares, for example, disposed of tens of millions of dollars of nonperforming loans. Intervest Bancshares did the same, saying it sold the assets “at a substantial discount to their net carrying values.” By selling loans now, however, banks have to realize losses and risk falling below regulatory capital levels. “If they hold the loans till they mature they get time to raise capital before they sell,” explains Bansal.

Nonperforming assets are still rising at some of the 44 banks. Dearborn Bancorp’s nonperforming assets inched up to 14.5% in the second quarter, a 50 basis point quarterly increase. (Dearborn, parent of Fidelity Bank [Michigan], had 65% of its loan book in CRE as of the first quarter.) The bank said that according to regulatory guidelines, it was undercapitalized as of June 30.

Editor’s note: A previous version of this story incorrectly identified Wilson Bank Holding Co. as one of the top five $1 billion-plus banks in which commercial real estate loans made up more than 50% of the total loan portfolio. In actuality, Wilson Bank Holding Co.’s CRE exposure is less than 35% of its total loans outstanding.